Exempt Going into Overtime

One of the largest and most stressful expenses for businesses is payroll. New legislation going into effect July 1st of this year has the potential to impact the payroll of businesses in all industries. On August 30th, 2023, the Department of Labor (DOL) published a notice to raise the minimum salary for exempt and highly compensated employees under the Fair Labor Standards Act.

Effective July 1st, 2024, the exempt employee salary threshold, which sits at $35,568, will increase to the equivalent of an annual salary of $43,888 and will further increase to $58,656 on January 1st, 2025. This means that any salaried employee who works more than 40 hours during a given week and falls below the above salary threshold will be entitled to time and a half compensation for every additional hour. Employers should be aware that some states may have minimum exempt salary thresholds that are stricter than the current or proposed federal minimum. Consult local tax authorities or your accountant to see if this applies to your company.

In addition to this increase, the new update will also raise the threshold for “highly compensated employees” (HCE) from an annual salary of $107,432 to $132,964, effective July 1, 2024, then again on January 1, 2025, to $151,164. Employees are considered an HCE if they are in the top 20% of employees ranked by compensation, in addition to exceeding the thresholds or held at least 5% ownership at any point during the year in question. For more information on HCEs, see IRC section 414(q). The threshold for compensation levels will be reevaluated every three years thereafter to ensure that salaries are keeping up with the market and inflation levels.

How does this affect me as a business owner?

Plan on a higher wage expense if you routinely have salaried employees who work more than 40 hours a week. Alternatively, prepare to hire additional staff to cover these extra shifts to reduce the amount of overtime accrued.

Consider the effect on benefit plans for your exempt employees. All health plans are required to undergo an annual non-discrimination testing against HCE. With this change, certain employees may change exempt classification and need their plans adjusted.

Do an internal audit of your staff to verify that employees are accurately classified as either exempt or non-exempt. If you have salaried employees who are interested in switching over to an hourly compensation plan, now would be an opportune time to have that conversation.

For many industries in which hourly compensation is the standard, this legislation will have little to no effect on daily operations. It does set a precedent as to what future legislation could be regarding minimum wages.

If you would like assistance in tax planning regarding this update or additional changes, our tax professionals are ready to help prepare you and your business for the coming year.

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Sources:

Identifying Highly Compensated Employees in an Initial or Short Plan Year | Internal Revenue Service. (n.d.). Www.irs.gov. Retrieved May 10, 2024, from https://www.irs.gov/retirement-plans/identifying-highly-compensated-employees-in-an-initial-or-short-plan-year

Biden-Harris administration finalizes rule to increase compensation thresholds for overtime eligibility, expanding protections for millions of workers. (n.d.). DOL. https://www.dol.gov/newsroom/releases/whd/whd20240423-0 Notice 2023-75. (n.d.). https://www.irs.gov/pub/irs-drop/n-23-75.pd